Losing trust is bad
Interviewing a meta scientist. The importance of trust in finance. Investing week. Listening to Tyler Cowen. Party.
I reflect on the importance of trust in finance. Highlight the limitations of expected value. The FTX blow up.
I have an excellent conversation on metascience with Michael Nielsen. Metascience may be one of the most important fields we need to develop to advance human knowledge.
I give you quirky tips for navigating an investment conference plus investing week.
My notes on hearing Tyler Cowen on exiting stagnation, and if liberal democracies feel stuck
You are still invited to party/meet-up on Nov 23, I reckon it’s going to be on the larger side (50+ people) this time. If you’d like to join the Slack group for the meet-up you can sign up here.
Links (end of letter): type design, inflation targeting, carbon removal, dreams.
I seem to have a lot to say this week. Probably due to a child who doesn’t sleep…
Investing week. I had an engagement with an oil and gas company this week. Dinner and drinks of over 3 hours. To the median person, scrutiny and thinking about energy is very much under rated. The median person thinks only a small (if any) amount on this. For the ESG person deeply intertwined in ESG policy world, there is an argument that mere words and pronouncements do not get you far (Stuart Kirk gives you this argument in extreme), where is the good faith discussion?
The issue of so-called carbon scope 3, the amount of “responsibility” a company has for the use of its product is contested. The limited analogy here is with yogurt pots or guns. What responsibility does a company have (or government or consumer etc.) for what the end user does with the yogurt pot or the gun?
I would also observe, when was the last time you had tell of a good faith 3 hour discussion on these matters between owners, senior management, asset managers and people who care? I do not hear so much of it. I will tell you there are people trying very hard to do the right thing and find the right answer when objective-level questions have no simple answer that a majority of people accept.
I also met and listened to 20 over, maybe more, biopharma, med technology, healthcare companies this week. I can confirm that healthcare and medical science is still powering on ahead. I have a quirky top tips here for navigating such conferences.
I have 11 tips to make the most of such a conference:
-Always have all your stuff with you eg coat, bag, iPad etc.
-Always be super kind to staff, admin and helpers
-If you need to cancel, let organisers know in advance
-Plan for all the meetings you want to take
-Allow space for “focused serendipity”, go to something you know nothing about
-Dress for comfort and speed, be aware of the signal
-In any planned meeting, have one great prepared specific question
-In any unplanned, meeting have your go-to list of useful questions
-Know where the least busy toilets are, find them early
-Prepare to say Yes to the unexpected
-Prepare to say No to the waste of time
And a couple of observations here.
The male\female ratio.
The “uniform” of the men, in particular, everyone is in suits, occasional tie
The amount of small group and 1-1 chat
On this Blog here.
On one level, one of my most important conversations this week was with Michael Nielsen. Michael is a leading thinker on metascience after developing the fields of quantum computing and open science.
I view an understanding of metascience as non-trivially possibly one of the most important fields we need to develop to advance human knowledge. Perhaps, I give it a 60% chance of being that important. Hard to know for sure on new fields of knowledge, but I increasingly see that we do not have very good ideas on how our social processes evolve.
How did we really end slavery?
What did/and is going with women rights? Disability rights?
How will we care about the environment?
Do we know the best ways of discovering new ideas?
How should we go about training artificial intelligence?
These meta and social processes, I judge, are not well understood and our capacity to understand them could bring us another leap in human knowledge. Are some of the processes closer to a mathematical or physical truth? Would an alien also be able to discover and apply these process the same?
How do we view stories?
What art tell us about being human?
If you like the podcast, you should go back and read Michael and Kanjun’s original book/paper. Plenty of food for thought.
This is what it is about: https://www.thendobetter.com/arts/2022/11/15/michael-nielsen-metascience-how-to-improve-science-open-science-podcast
Michael Nielsen is a scientist at the Astera Institute. He helped pioneer quantum computing and the modern open science movement. He is a leading thinker on the topic of meta science and how to improve science, in particular, the social processes of science. His latest co-authored work is ‘A Vision of metascience: An engine of improvement for the social processes of Science’ co-authored with Kanjun Qiu (open source book link). His website notebook is here, with further links to his books including on quantum, memory systems, deep learning, open science and the future of matter.
I ask: What is the most important question in science or meta science we should be seeking to understand at the moment ?
We discuss his vision for what a metascience ecosystem could be; what progress could be and ideas for improving the the culture of science and social processes.
We imagine what an alien might think about our social processes and discuss failure audits, high variance funding and whether organisations really fund ‘high risk’ projects if not that many fail, and how we might measure this.
We discuss how these ideas might not work and be wrong; the difficulty of (the lack of) language for new forming fields; how an interdisciplinary institute might work.
The possible importance of serendipity and agglomeration effects; what to do about attracting outsiders, and funding unusual ideas.
We touch on the stories of Einstein, Katalin Kariko (mRNA) and Doug Prasher (molecular biologist turned van driver) and what they might tell us.
We discuss how metascience can be treated as a research field and also as an entrepreneurial discipline.
“...."How good a use of the money actually is? Would it be better to repurpose that money into more conventional types of thing or not?" It's difficult to know exactly how to do that kind of evaluation, but hopefully, meta-scientists in the future will in fact think very hard and very carefully about how to do those kinds of evaluation. So that's the meta-scientist research discipline.
As an entrepreneurial discipline, somebody actually needs to go and build these things. For working scientists it's often remarkably difficult to do that because it doesn't look like a conventional activity. This isn't sort of science as normally construed. Something that I found really shocking-- you may be familiar with and hopefully many listeners maybe familiar with, the replication crisis in social psychology. So this was, I guess most famously in 2015, there was a paper published in which 100 well-known experiments in social psychology were replicated. I think it was 36% of the significant findings were found to replicate and typically the effect size was about roughly halved.
So this was not a great look for social psychology as a discipline and raised a lot of questions about what was going on. That story I just told is quite well-known. What is much less well-known is that in fact going back many decades, people had been making essentially the same set of sort of methodological criticisms. Talking about the file drawer effect, talking about p-hacking, talking about all these kinds of things which can lead to exactly this kind of failure. And there are some very good papers written in-- I think the earliest I know is from the early sixties. Certainly in the 1970s and 1980s you see these kinds of papers. They point out the problems, they point out the solutions. “Why did nothing happen?” "Well, because there's no entrepreneurial discipline which actually allows you to build out the institutions which need to be built out if anything is actually to change."
We discuss how decentralisation may help. How new institutions may help. The challenges funders face in wanting to wait until ideas become clearer.
We discuss the opportunity that developing nations such as Indonesia might have.
We chat about rationality and critical rationality.
Michael gives some insights into how AI art might be used and how we might never master certain languages, like the languages of early computing.
We end on some thoughts Michael might give his younger self:
The one thing I wish I'd understood much earlier is the extent to which there's kind of an asymmetry in what you see, which is you're always tempted not to make a jump because you see very clearly what you're giving up and you don't see very clearly what it is you're going to gain. So almost all of the interesting opportunities on the other side of that are opaque to you now. You have a very limited kind of a vision into them. You can get around it a little bit by chatting with people who maybe are doing something similar, but it's so much more limited. And yet I know when reasoning about it, I want to treat them like my views of the two are somehow parallel but they're just not.
There are three observations I wish to make on the crypto exchange, FTX, and its bankruptcy, alleged fraud and asset trading. The observations are around:
Trust
Proprietary trading aka prop trading
Limits of «expected value» and St Petersburg paradox
Codas: why? What falls in status, crazy balance sheets.
There is much around finance - and indeed life - that is built around trust. In my podcast with economic historian Mark Koyama, he suggests that the ability to create trust at scale was an important factor for how rich nations developed. (Transcript/link here)
Some scholars believe that the ability of the Quaker people to be established as trustworthy enabled them to do better business.
The importance of trust is so ubiquitous in life today that it often goes without saying. Yet, you can observe nations or societies with more limited trust and observe the problems there.
Trust or the lack of trust still impacts financial firms. If people do not trust a bank to have their money they will withdraw the money and possibly cause a bank run.
Why would people want to break with trust when social norms values trust so highly? I can think of examples but this example around FTX, if I might speculate, is intriguing and in part it rests on the problems of expected value theory. And in part the challenges that trading have always brought.
In the history of financial institutions there are many examples of highly intelligent teams or organisation who lose a lot of money, occasionally everything and more. These teams are often making trading bets or running proprietary trading aka prop trading or have trading strategies in what we call hedge funds. The list is as long as financial history with perhaps in more recent times the notable example being LTCM, Long-Term capital management.
Trading teams have different types of strategies. Many of them at their core have some concept of expected value. The idea of (probability of event happening) x (value) = expected value. This is calculated either by computer algorithms or by human judgement on computer outputs. (They also try and arbitrage, which is less reliant on core expected value formulas.)
For rules based games with closed probabilities such as standard backgammon then over time these rules work well.
But, when you enter the messy world of humans and human values then this concept can break down. The philosopher Larry Temkin shows how it can break down at the level of moral philosophy. See my podcast on this.
Decision theorists and economists can show the problems of the St Peterberg’s Paradox. The stock market regularly highlights challenging events such as “meme stock” price movements. (These don’t fit into traditional expected value calculations).
Expected value can give a good estimation of a certain type of value in many situations but it can often not capture the whole of a value or a decision.
The St Petersburg paradox offers you the choice of 51% chance of some large gain, but a 49% chance of losing everything. For instance, you could double the value of the world or even 10x the value with a 51% chance or a 49% chance everyone in the world is wiped out.
Tyler Cowen gave the CEO of FTX, SBF (Sam Bankman-Fried) the St Petersburg choice. SBF said he would take it. Certain utilitarians and gamers will do so as the expected value is positive. But the paradox is if you are given the choice enough times you will after some time inevitably go to zero.
Cowen: …let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?
BANKMAN-FRIED: With one caveat. Let me give the caveat first, just to be a party pooper, which is, I’m assuming these are noninteracting universes. Is that right? Because to the extent they’re in the same universe, then maybe duplicating doesn’t actually double the value because maybe they would have colonized the other one anyway, eventually.
COWEN: But holding all that constant, you’re actually getting two Earths, but you’re risking a 49 percent chance of it all disappearing.
BANKMAN-FRIED: Again, I feel compelled to say caveats here, like, “How do you really know that’s what’s happening?” Blah, blah, blah, whatever. But that aside, take the pure hypothetical.
COWEN: Then you keep on playing the game. So, what’s the chance we’re left with anything? Don’t I just St. Petersburg paradox you into nonexistence?
BANKMAN-FRIED: Well, not necessarily. Maybe you St. Petersburg paradox into an enormously valuable existence. That’s the other option.
(The whole conversation on crypto and philosophy with Tyler and SBF’s conversation on Oddlots where he suggests much of crypto is a scam now make super fascinating reading)
Many prop trading teams eventually lose a lot of money. This observation has lead many mainstream financial institutions - usually investment banks to close down their prop trading teams or run them pretty small such that any blow up is not a critical blow. Prop trading can make a lot of money for a long time, but it seems at some point either the 49% catches up or a mistake is made. The successful people know when to stop or are lucky enough to stop, but getting out of the game at an appropriate time is, from what I can tell, quite rare. Investment banks have or are meant to have a lot of oversight so they can close down prop traders or cut off trading clients before losses become too big to handle.
Trading teams have many methods of risk control to stop them selves blowing up. Stop losses, limited bets size, diversifying bets, quick control of trading positions and the like, but ultimately a miscalculation or error or an event outside the model or traders experience occurs and large losses occur. In theory perhaps this is preventable but in the messy world of humans and imperfect models this preventention does not occur.
FTX was very close to a prop trading organisation, Almeda. SBF founded Almeda before FTX and had close relations with the traders there.
(This is my speculation [more data on this has come out, essentially suggesting something like this has happened] ) it seems likely that Almeda had some large trade(s) go wrong. If Almeda was part of an investment bank, the savvy bank risk control would close Almeda down before losses could balloon. Even if there were no recent losses, at some point Almeda would make losses and if the traders could not control the losses and positions, then the correct approach would be to let Almeda fold and not allow Almeda losses to infect any other part of the system.
(This is akin to the ideas that Nassim Taleb writes about in having a system which has lots of small pieces and is anti-fragile rather than a system which has parts which are “too big to fail” or is too centralised)
It is not exactly clear but WSJ and other media reports suggest that to cover Almeda for some reason (possibly bad trades, possibly mis-labelled accounts, possibly some inter-accounting reason; it’s possible Almeda did something even more mysterious that wasn’t simply trading, there is certainly a very complex org chart) FTX used client funds (or, possibly even just FTX or SBF funds) and when there was a rumour something was amiss and clients all wanted their money/crypto back, FTX did not have the funds to give back.
It’s unclear if this is what happened, FTX and/or, Alameda seems to have used its own token - FTT - to support either loans or trading activities which may have complicated matters as well.
In any case, on reflection, a person committed to the 51% bet for trading would inevitably run into trouble. It’s also seems to be the case that a strong unthinking commitment to only expected value models will also lead you to come unstuck. (Interestingly, SBF seems to be a keen gamer where expected value really does generally work)
Putting that all together the lessons I take from this are:
Trading teams inevitably fail. How you manage this is important. Much of Nassim Taleb’s speak to this. Beware ruin risks.
Trust. Social capital is very valuable. Destroying has many negative ramifications.
Sophisticated people forgo standard due diligence in the presence of strong charisma (this has endless examples). Classic red flags on a check list are there for a reason.
Do not trust a trading team that is closely intertwined with a client fund entity. Flags were raised on Alameda and it was obvious SBF was very close. Why exactly SBF decided to cover Alameda with client funds (if that is what happened) we might never know, but it seems like a bet (maybe a 51% bet?) gone wrong.
The future… the number one crypto exchange Binance does not have a clean past, much of crypto remains full of scammers, Effective Altruism is going to be tainted perhaps to some degree permanently and the idea of “super earners” earning to give away money (basically a billionaire earn to give strategy) is going to (perhaps rightly) take a major ding.
Coda, Personal stories:
The “why” is still interesting dramatically. Why do this? Also is there a love story of sorts with Caroline?
I went to listen to Tyler Cowen, David Goodhart and Stephen Bush have a panel chat:
I have walked this walk home through Soho countless times over the last 20 years. Down Dean Street with people of all fashion and colours singing, drinking and loving in the same but different ways.
For all our moans, this microcosm of London, this microcosm of liberal democracy is thriving and living and has - if anything - grown stronger over 20 years.
For sure, for example, queers must fight their good fight and allies must support them. But here they are as open as ever, I sense. There is even some disability access (yes there should be more). Wealth has crept up on us.
I travel by the Elizabeth line. A new piece of transport infrastructure. Yes, we can still build! (if but a little slow). We can travel to Shenfield in the east directly in under an hour, leaving at midnight. The people of 1922 would be astonished. The people of 1822 would think this fantastical magic. The people of 1722 would not even comprehend.
Think! Today! This seems to me almost how we might view an octopus’ life… so far out of our ability to understand yet a clever sentient being.
I'm walking down Dean Street after listening to Tyler Cowen along with David Goodhart and Stephen Bush, chaired by Munira Mirza.
Purportedly this panel were debating if liberal democracies were feeling stuck. But John Gray the philosopher, known for some of his critiques here, was sick so was not present.
Tyler Cowen started by arguing:
The stagnation he identified for the last 20 or so years is on the cusp of being over. This is driven by
biomedical innovation (in part catalysed by vaccines (mRNA, COVID, deepmind [my addition])
step change in AI
even green energy might be getting somewhere
He conceded there is still much too regulation (and “supply side reform” eg ease of permitting would be helpful) in all areas except (1) finance and (2) environment.
Tyler argued this innovation cusp is in part from markets and in part from governments.
He suggested if you are conscientious, work hard, and try hard that the opportunities have never been better.
You will need to work with and get used to AI, but so be it, the world will be better. We had the transition from horses to cars. From letters to email. So be it.
This is a fundamental change to human condition. Human are no good at seeing the invisible growth which is key to this, we prefer stories and anecdotes, but nonetheless this is the important thing - economic growth (tempered by environment cf. being ⅔ utilitarian and Stubborn Attachments, see earlier blog).
There was some concession to the difficulties of “splitting the pie fairly” rather than growing the pie, but growing the pie was the important thing. (This does follow from economic history also from recent work by eg Brad De Long, centre left economist, Slouching to Utopia; and Mark Koyama/Jared Rubin, How the World Became Rich - see my podcast previously with Mark)
Stephen Bush mostly agreed, harking back to life in 1900s. Goodhart was a little more pessimistic but seemed to have been overcome by Tyler’s optimism and charisma on this. [Although his microphone was also quieter, so I think I might have missed his comments. ED: Goodhart replied on twitter, so I now have his arguement in brief: his argument "was arguing that after 30 year liberal run, we had political push back (2016) from left behinds creating an nywhere/Somewhere stalemate. Politics more democratic but more stuck + despite policy consensus on many big things pols less good herders of cats… See this New Statesman piece and whole book on it)
(Mirza seemed almost surprised by this, too, thinking Tyler might still be worried about stagnation and regulation; she offered in passing the strongest rebuttal in evoking the people outside London, poorer and with different opinions perhaps).
Tyler suggested perhaps the centrist who wants to get on may in some ways be the most politically homeless as the left and right mirror each other and need each other to feed off.
Tyler ended up evoking London as his piece of culture to understand the world (citing current art exhibitions including: Cezanne and Stephen Bush chose Ali and Ava (I have not seen but my friend also recommends)
I asked:
What do you make of median voter theory?
Should we have 10% less democracy?
Tyler, and the rest thought median voter theory was working in the UK and US.
Tyler argued for 7% less democracy but to not over do it here as democracy was still great. Bush suggested UK had about the right amount of democracy.
Links:
On type design:
What I’m reading.
Inflation Targeting
Carbon removal
Dreams